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IAS 41 Agriculture — Bearer biological assets

Date recorded:

The Staff proposed that the IASB should add a limited-scope project on IAS 41 Agriculture for bearer biological assets (BBAs) to its agenda. IAS 41 measures biological assets related to agricultural activity at fair value less costs to sell based on the principle that biological transformation is best reflected by fair value measurement. The concept is that an increase in the fair value of the biological assets is expected to increase future economic benefits to the entity. The staff presented their analysis to the Board mentioning that a number of commentators had argued that fair value measurement was not appropriate for BBAs, in particular bearer crops, because BBAs are no longer undergoing biological transformation. These commentators argued that, once mature, these bearer biological assets were not “growing” assets but “productive” assets and hence should be accounted for under IAS 16 Property, Plan and Equipment, similar to machinery in a production plant. The staff highlighted to the IASB members that IAS 41 has a single accounting treatment for both bearer and consumable biological assets – that is the fair value approach.

The Staff presented feedback that had been received from the agenda consultation and user outreach. There is support (especially those in the plantation industry) for a limited-scope project for BBAs and such a project is also supported in the Issues Paper produced by the Asian-Oceanian Standard Setters Group (AOSSG) and the IASB's Emerging Economies Group (EEG). Users of financial statements that responded to the IASB's agenda considered a project on bearer biological assets to be important/urgent. The AOSSG noted that concerns had been raised by investors (as well as preparers) about the relevance and usefulness of information provided to users for certain biological assets accounted for at fair value. Specifically the paper included a survey performed by the Malaysian Accounting Standards Board (MASB) in 2010 that found that a group of analysts specialising in plantation did not find fair value information for BBAs useful, particularly the presentation of changes in fair value within the profit or loss – which in some instances can be large and distort profits. The AOSSG Issues Paper proposes that the IASB should amend IAS 41 by adding a definition for BBAs and including them within the scope if IAS 16 and keeping consumable biological assets (CBAs) within IAS 41. Staff outreach in this area (albeit a limited number of respondents) also identified that analysts ignore fair value information in their analysis. It was also identified that fair value information is not useful for BBAs due to subjectivity in arriving at this fair value and lack of comparability between entities.

The Staff were also of the view that the fair value approach is suitable for consumable biological assets (CBAs) (CBAs are cultivated for sale and the cash flows expected on sale increase as the CBAs grow and hence fair value value measurement would be useful) but not BBAs (biological transformation is not relevant in generating future economic benefits). The staff agreed with the commentators that BBAs meet the definition of property, plant and equipment in which case they would be valued on a cost or revaluation model. The accounting for CBAs would not change with the proposal.

The Staff highlighted that the limited-scope project would meet the IASB criteria for new IFRSs or major amendments in line with the Due Process Handbook 2012.

The Staff paper identified that the key issues to be addressed by the IASB if the limited-scope project on IAS 41 goes ahead:

  1. What definition of BBAs should be used in the scope of the amendment (e.g. asset has no alternative use, predominant use of asset (i.e. the treatment of a biological asset would depend on what it is predominantly used for), or plants only – i.e. excluding livestock)?
  2. Should guidance for BBAs be incorporated into IAS 16 or remain in IAS 41?
  3. What should be the measurement attribute of BBAs before being placed into production (e.g. fair value or cost accumulation)?
  4. Is there a need for additional measurement guidance in IAS 16 for BBAs, such as:
    1. determining the unit of account;
    2. accounting for CBAs growing on the BBAs;
    3. unique costs of growing BBA (capitalise versus expense);
    4. additional disclosures; and
    5. transitional provisions?

It was expected that the definition of BBAs would be the main issue and take most time to resolve. The above issues were not discussed in detail in the meeting.

A draft project plan was also presented to the IASB members. It was proposed that a Discussion Paper would not be required due to the existing research that had already been undertaken in the area. Key dates were the development of an Exposure Draft (ED) by March 2013, IASB final revisions to IAS 41 by Q1 2014 with an effective date for revision of 2015.

All of the Board members tentatively agreed to both the Staff’s proposal to add a limited-scope project on IAS 41 Agriculture for bearer biological assets (BBAs) to its agenda and also to the proposed project plan.

Those Board members that did agree with the Staff proposal did mention that this project would face certain complexities. It was noted that the BBAs will likely require a large up-front investment (protection/treatment costs etc) to get them to a position before they can be ready for a constant production and it will also take time for the BBAs to be ready for production. It was noted that this is a difference from an IAS 16-style production factory and one member questioned how these initial investment costs would be accounted for under IAS 16 and whether this also needs to be discussed at a later date.

Other IASB members shared the views of the Staff members that one of the key considerations is what the scope of the limited-scope project would entail – plants, cows or exclude livestock? These members hence expressed that a key issue was the definition of a BBA. One particular member expanded on this definition point and whether there was a clear cut definition of a BBA and CBA and what the accounting would be where this may be borderline. One member was also concerned that IAS 41, in total would be revisited, when the issue at hand was related to BBAs and hence this should be the scope of the project. Two members identified that a difficulty may be how to separate the costs accumulated in the “growing” phase from other production and maintenance costs and how to account for these. However he noted that similar difficulties had been encountered in insurance accounting regarding which costs to capitalise and this should not be a barrier.

Certain members expressed concern that the project should not start with an answer, for instance it should not start with the AOSSG conclusion, as one member seemed to err towards. These IASB members noted that the project should start out on a “neutral” basis and look at all of the issues before coming to a conclusion regarding amending IAS 41, which was the view of the AOSSG paper. Certain Board members expressed a desire that the Staff further extend their outreach outside of Malaysia. Questions were asked as to how far reaching the survey was that had concluded that fair value information was not appropriate. The Staff responded that the responses were limited. The member suggested that the outreach be expanded. One Board member also highlighted that although IAS 41 is a fair value standard, where fair value cannot be measured then a cost measure is allowed.

One IASB member reluctantly agreed with the Staff proposal but concluded that fair value accounting would be the resultant approach as to get the asset into property, plant and equipment, fair value would be required and then when depreciating, one would also use fair value. She mentioned that to ignore the increase in value during the “growth” period in agricultural terms would be the equivalent of ignoring the time value of money for financial transactions.

Another IASB member also asked that the unit of account be considered and explored as identified in the Staff paper.

In response to some of the complexities raised by the Board members, the Chair noted that the Staff had worked hard to extend the outreach with little success and further extension would be difficult.